Financial Section ARLINGTON COUNTY EMPLOYEES RETIREMENT SYSTEM

Transcription

1 ARLINGTON COUNTY EMPLOYEES RETIREMENT SYSTEM

2 10 Arlington County Employees Retirement System

3 Arlington County Employees Retirement System 11

4 12 Arlington County Employees Retirement System

5 MANAGEMENT DISCUSSION & ANALYSIS The discussion and analysis presented in this section provides an overview of the Arlington County Employees Retirement System s ( the System ) financial activities for the fiscal year ended June 30, Please read this discussion and analysis in conjunction with the basic financial statements which follow and the letter from the Executive Director and Chief Investment Officer included in the Introductory Section of this Comprehensive Annual Financial Report. The System provides retirement benefits to Arlington County Uniformed and General employees and to certain School Board employees. Total fiduciary net position held in trust combined with consistent and significant County contributions leave the System well positioned to continue to meet its obligations to members. Financial Highlights Net Position System net position at June 30, 2014 totaled $1.980 billion, an increase of $283 million, or 16.7%, from June 30, 2013, primarily due to an increase in the value of investments. Additions and Deductions to Net Position Additions to net position include County and member contributions and interest and dividends on Fund investments; deductions to assets are primarily driven by benefit payments. For fiscal year 2014: Contributions increased to $65.4 million from $59.4 million in fiscal year Dividends and interest on investments increased to $42.0 million from $39.3 million in fiscal year Payments to members increased to $86.3 million from $82.5 million in fiscal year Investment Gains and Losses Investment gains, which include realized and unrealized changes in investment portfolio market value, increased by $99.2 million to $268.6 million in fiscal year 2014 from $169.4 million in fiscal year Fund investment returns of 18.4% for the year exceeded the 15.8% benchmark. The Fund s investment results were largely driven by its underweight fixed income allocation and the overweight to domestic equities. The System s investment portfolio is well diversified and strives to balance capital preservation in down markets with generating an adequate risk adjusted return over the long term. Funded Ratio As of June 30, 2014, the System was actuarially funded at 94.4%, up from 89.9% as of July 1, 2013, due to investment returns exceeding the actuarial assumed rate of return. GASB 67 creates a distinction between the funding and accounting reporting of defined benefit plans. The above ratios are based on the funding assumptions. Arlington County Employees Retirement System 13

6 SUMMARY OF PLAN NET POSITION AND CHANGES IN PLAN NET POSITION FOR THE YEARS ENDED & 2013 Summary of Fiduciary Net Position Increase Assets June 30, 2014 (Decrease) June 30, 2013 Cash $ 48,957,591 $ 7,455,934 $ 41,501,657 Receivables 3,769,117 (2,046,206) 5,815,323 Investments 1,928,836, ,327,149 1,651,508,935 Sec. Lending Collateral - (276,605) 276,605 Total Assets $ 1,981,562,792 $ 282,460,272 $ 1,699,102,520 Liabilities Accrued Expense $ 1,993,555 $ (3,099) $ 1,996,654 Sec. Lending Obligations - (276,605) 276,605 Total Liabilities $ 1,993,555 $ (279,704) $ 2,273,259 Total Net Position $ 1,979,569,237 $ 282,739,976 $ 1,696,829,261 Summary of Changes in Fiduciary Net Position Increase Additions June 30, 2014 (Decrease) June 30, 2013 Employer Contributions $ 53,718,087 $ 5,715,136 $ 48,002,951 Member Contributions 11,665, ,608 11,408,300 Dividends & Interest 42,021,035 2,742,319 39,278,716 Investment Gains 268,635,204 99,192, ,442,367 Other 347, , ,248 Investment Expense (5,929,040) (651,941) (5,277,099) Total Additions $ 370,458,698 $ 107,455,215 $ 263,003,483 Deductions Retirement Benefits $ 85,308,562 $ 3,785,399 $ 81,523,163 Refund of Contributions 1,004,180 40, ,766 Administrative Expense 1,405, , ,561 Total Deductions $ 87,718,722 $ 4,271,232 $ 83,447,490 Change in Net Position $ 282,739,976 $ 103,183,983 $ 179,555, Arlington County Employees Retirement System

7 Overview of Financial Statements The System s basic financial statements, which follow, include: Basic financial statements Notes to the financial statements Required supplementary information Supplementary information Summarizing the information available in each: Basic Financial Statements These statements include a statement of fiduciary net position and a statement of changes in fiduciary net position, presented as of and for the year ended June 30, 2014, respectively. These financial statements reflect the resources available to pay benefits to retirees and other beneficiaries as of year-end, as well as changes in those resources during the year. Notes to the Basic Financial Statements The financial statement notes provide additional information essential to fully understanding the data provided in the Basic Financial Statements. Specifically: Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Provides a description of the System, the funding policy and member contributions and benefits and lists the various actuarial assumptions Discusses System s net pension liability and long term expected rates of return Describes significant accounting policies Discusses System deposits and investments and includes several tables categorizing investments by type while providing disclosure on interest rate, credit quality and currency related risks Explains the System s tax status Describes any subsequent events since the financial statements were issued Reports any unfunded commitments in limited partnerships Required Supplementary Information This information illustrates the System s funding progress, change in net pension liability, annual employer contributions as a percentage of required contributions and investment returns. Supplementary Information Details regarding administrative and investment related expenses are also provided. Contact Information The System s financial statements are designed to present users with a general overview of the System s finances and to demonstrate the prudent exercise of the Board s oversight. Please direct any questions or requests for further information to the Arlington County Employees Retirement System, 2100 Clarendon Boulevard, Suite 504, Arlington, VA Copies of the Comprehensive Annual Financial Report are available from the Retirement Office or at the Central Public Library. The report may also be accessed at A summary report will be issued to plan members in January Arlington County Employees Retirement System 15

8 ARLINGTON COUNTY EMPLOYEES RETIREMENT SYSTEM (A Pension Trust Fund of Arlington County, Virginia) STATEMENT OF FIDUCIARY NET POSITION ASSETS Cash and Cash Equivalents $48,957,591 Contributions Receivable: Employer 2,309,178 Employee 491,263 Accrued Interest and Other Receivables 968,676 Investments, at Fair Value: Foreign, Municipal and U.S. Government Obligations 48,126,230 Corporate Fixed Income Obligations 156,725,323 Domestic and Foreign Equities 498,009,244 Private Equity 46,210,495 Real Estate Funds 15,909,978 Pooled Equity 680,009,227 Pooled Fixed Income 282,336,657 Convertibles 201,508,930 Total Investments 1,928,836,084 Total Assets 1,981,562,792 LIABILITIES Accrued Expenses and Other Liabilities 1,993,555 Total Liabilities 1,993,555 NET POSITION RESTRICTED FOR PENSIONS $1,979,569,237 See accompanying notes to financial statements 16 Arlington County Employees Retirement System

9 ADDITIONS Contributions ARLINGTON COUNTY EMPLOYEES RETIREMENT SYSTEM (A Pension Trust Fund of Arlington County, Virginia) STATEMENT OF CHANGES IN FIDUCIARY NET POSITION FOR THE YEAR ENDED Employer $53,718,087 Employee 11,665,908 Service Credit Buybacks 204,465 Total Contributions 65,588,460 Investment Income Interest and Dividends 42,021,035 Net Appreciation in Fair Value 268,635,204 Commission Recapture 942 Investment Income 310,657,181 Less: Investment Expense 5,929,040 Net Investment Income 304,728,141 Securities Lending Activity Security Lending Income 190,665 Bank Management Fees (48,568) Net Income From Security Lending 142,097 Total Additions 370,458,698 DEDUCTIONS Members' Benefits 85,308,562 Refund of Members' Contributions 1,004,180 Administrative Expenses 681,430 Other Consulting Expenses 724,550 Total Deductions 87,718,722 Net Increase in Net Position 282,739,976 Net Position Restricted for Pensions, Beginning of Year 1,696,829,261 Net Position Restricted for Pensions, End of Year 1,979,569,237 See accompanying notes to financial statements Arlington County Employees Retirement System 17

10 NOTE 1. PLAN DESCRIPTION The Arlington County Employees' Retirement System (the System) is a pension trust fund of the Arlington County, Virginia (the County) financial reporting entity and is included in the County s comprehensive annual financial report. The accompanying financial statements present information on the operations of the System in conformity with generally accepted accounting principles. The System is a single employer public employee defined benefit pension plan covering substantially all employees of the County. Plan Administration On November 16, 2004, amendments to Arlington County Chapters 21, 35 and 46 were made to transfer the System s administrative responsibilities to the County Manager while leaving investment responsibility with the Board of Trustees (the Retirement Board). The Retirement Board consists of seven voting and three substitute trustees as follows: Three appointed by the County Board One appointed by the County Manager One trustee and one substitute trustee elected by general employees One trustee and one substitute trustee elected by police officers, firefighters, and deputy sheriffs (uniform) One trustee and one substitute trustee elected by retired employees If no eligible person is nominated for an elected position, the County Manager appoints an eligible person to serve as trustee. In December 2007, the Arlington County Code was modified to require that the trustees elected by active employees be active employees and that the trustees elected by retired employees currently be receiving retirement benefits from the System. The trustees annually elect a President, Vice-President and Secretary from among their members, and appoint a Treasurer and Assistant Treasurer, who may or may not be a member of the Retirement Board. The trustees annually approve a Retirement Board Investment Office administrative budget. Administrative expenses are funded from System assets. 18 Arlington County Employees Retirement System

11 Plan Membership At June 30, 2014, System membership consisted of the following: Active Employees: General Uniformed School Total Vested 1, ,456 Non-vested ,099 Total Active Employees 2, ,555 Vested Deferred Retirees and Beneficiaries 1, ,031 3,774 School employees consist of School Board employees and Department of Human Service employees hired prior to February 8, Uniformed employees consist of all public safety employees. All other County employees are included under General employees. Please refer to Chapters 21, 35 and 46 of the Arlington County Code for a more detailed description of the System. Benefits Provided The System provides retirement benefits as well as survivor and disability benefits. The table on the following page describes the benefits and how they are calculated. All plan members are eligible for disability benefits after two years of service and qualify for Social Security disability retirement. Disability retirement benefits are determined in the same manner as retirement benefits with no reduction for early retirement. All normal retirement benefits vest after five years of credited service. If an employee leaves covered employment before five years of credited service, accumulated employee contributions plus interest are refunded to the employee or designated beneficiary. A summary of member contribution rates, normal service retirement and average final compensation for the employees covered under the various Chapters of the Arlington County Code for the period ending June 30, 2014 is provided on the following page. Benefit terms provide for annual cost of living adjustments to each member s retirement allowance subsequent to the member s retirement date. The annual adjustments are 100% of the CPI-U increase up to a maximum of 3% plus one half of the CPI-U (consumer price index urban consumers) increase for the next 9%. This equates to a maximum of 7.5% increase for a 12% increase in the CPI-U. The System also provides a DROP (Deferred Retirement Option Plan) for employees eligible for retirement. Retirement benefits are paid into an employee directed 401a program for DROP participants. Arlington County Employees Retirement System 19

12 Member Contributions and Retirement Benefits Participants Covered Under Chapter Covers Employees Hired: Before 2/8/81 Before 2/8/81 2/8/81 or After Contribution Rates: General Employees 4% N/A 4% School Board Employees (Covered by VRS) 0% 0% 0% Uniformed Employees: - Management 5.62% N/A 5% through 1/3/09, 7.5% thereafter - Non-Management 6.62% N/A 5% through 1/3/09, 7.5% thereafter Normal Retirement Age: General County Employees School Board Employees N/A Uniformed Employees 50 N/A 52 Rule of 80 Applies Yes No Yes Retirement Benefit: Percentage of Average Final Salary (AFS) times years of creditable service subject to a 30 year maximum. AFS is generally the average of the three highest compensation years, including overtime. For Chapter 46 employees retiring on or after 1/4/09, the New AFS definition excludes overtime and most premium pays. 2.5% for each of the first 20 years plus 2% for each of the next 10 years 2.125% reduced by the VRS benefits under Formula A Retiring on/prior to 1/3/09 General: 1.5% Uniform: 2.0% until Social Security Eligible then 1.5%, 1.7% & 2.0% for each 10 year increment Retiring on/after 1/4/09 General: 1.7% New AFS OR 1.5% Prior AFS through 1/3/09 plus 1.7% New AFS thereafter Uniform: 2.5% through 1/3/09 plus 2.7% thereafter on New AFS OR 2.0% Prior AFS through 1/3/09 plus 2.7% New AFS thereafter until Social Security Eligible then 1.5%, 1.7% & 2.0% for each 10 year increment prior to 1/3/09 Employee contribution refund upon leaving County Contributions plus interest N/A Contributions plus interest 20 Arlington County Employees Retirement System

13 Contributions Chapters 21, 35 and 46 of the Arlington County Code establish the Plan and provide the basis for determining the contribution rates. The County Board may amend the Plan at any time. Based on an annual actuarial valuation prepared by an actuary selected by the Retirement Board of Trustees, a contribution rate is recommended to the County Board for adoption. The actuarially determined rate results in contributions to the Plan which, along with member contributions, are anticipated to be sufficient to fund the value of benefits expected to be earned by plan members during the year, plus an amount to amortize any unfunded actuarial liability. For the year ended June 30, 2014, the active member contribution rate was 4% of pay for general employees and 7.5% of pay for uniformed employees. The County s blended contribution rate was 22.6% of annual covered payroll. Rate of Return For the year ending June 30, 2014, the annual money-weighted rate of return on pension plan investments, net of pension plan investment expense, was 18.1%. The money-weighted rate of return expresses investment performance, net of investment expense, adjusted for the changing amounts actually invested NOTE 2. NET PENSION LIABILITY/ (ASSET) The components of the net pension liability/ (asset) of the County at June 30, 2014, were as follows: ($ in millions) Total Pension Liability $ 1,888.1 Plan Fiduciary Net Position $ 1,979.6 County's Net Pension Liability/ (Asset) $ (91.5) Actuarial Assumptions Plan Fiduciary Net Position as a percentage of the Total Pension Liability 104.9% The total pension liability was determined by an actuarial valuation as of June 30, 2014, using the following actuarial assumptions: Investment rate of return 7.25% Assumed inflation rate 3.75% Projected salary increases 3.75% Mortality rates were based on the RP 2000 Employee Mortality projected with scale AA to Arlington County Employees Retirement System 21

14 The actuarial assumptions used in the June 30, 2014 valuation were based on the results of an actuarial experience study for the period July 1, 2009 to June 30, Discount Rate The discount rate used to measure the total pension liability was 7.25%. The projection of cash flows used to determine the discount rate assumed that contributions from plan members will be made at the current contribution rate and that employer contributions will be made at rates determined by the Retirement Board, actuarially determined. Based on those assumptions, the pension plan s fiduciary net position was projected to be available to make all projected future benefit payments of current plan members. Therefore, the actuarial assumed rate of return on pension plan investments was applied to all periods of projected benefit payments to determine the total pension liability. The discount rate was decreased from 7.5% as of June 30, Sensitivity of the Net Pension Liability/ (Asset) to Changes in the Discount Rate The following presents the net pension liability of the Plan, calculated using the discount rate of 7.25%, as well as what the Plan s net position liability would be if it were calculated using a discount rate that is 1 percentage point lower (6.25%) or 1 percentage point higher (8.25%) than the current rate: NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting 1% Decrease (6.25%) Current Discount Rate (7.25%) 1% Increase (8.25%) ($ in millions) Plan's net pension liability/ (asset) $166.6 ($91.5) ($303.8) The accompanying financial statements are presented on the accrual basis of accounting with additions to fiduciary net position recognized when earned and deductions from fiduciary net position recorded when expenses are incurred. Member and employer contributions to the System are recognized in the period in which the contributions are due and payable in accordance with the terms of the plan as defined in the Arlington County Code. Benefits and refunds are recognized when due in accordance with the terms of the Plan. The accounting and reporting policies of the system conform to accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of additions and deductions in plan net position during the reporting period. Actual results could differ from those estimates. 22 Arlington County Employees Retirement System

15 Investments The System s investments are recorded at fair value. Fair value is based on quoted market prices from national exchanges, when available. Investment transactions are recorded as of the trade date. These transactions are not finalized until the settlement date. For real estate and private equity investments, where no readily ascertainable market value exists, System management relies on the fair values for individual investments based on the most recent financial statements available from the investment managers. Unrealized appreciation and depreciation of investments is reflected in the Statement of Changes in Fiduciary Net Position for the year. Adoption of New Accounting Standard GASB 67 introduces additional disclosure requirements to improve the accounting and financial reporting and transparency of public employee pensions by state and local governments. The System implemented the standard in NOTE 4. DEPOSITS AND INVESTMENTS a. Legal Provisions and Investment Policy The System is authorized by the Code of Virginia to invest funds of the System in conformance with the prudent person rule. Arlington County Code 21-23, 35-21, and require that assets of the System be invested with care, skill, prudence, and diligence under circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. Arlington County Code 21-24, 35-22, and require that investments be diversified to minimize the risk of large losses unless under the circumstances it is clearly not prudent to do so. The System s written investment policy provides for investment in all major sectors of the capital markets in order to diversify and minimize total investment program risk. Such sectors include, but are not limited to: Convertible securities Cash, money market funds and other short term investment funds Common stocks, preferred stocks, warrants and similar rights of U.S. and non-u.s. companies. Private equity. The System invests in private equity via a fund-of-funds and direct approach to maximize diversification by vintage year and investment type. Open and closed end pooled real estate funds and real estate investment trust securities Fixed income obligations of the U.S. government and its agencies, mortgage-backed securities, corporate bonds, and asset backed securities. In addition, fixed income obligations of non-u.s. Governments, companies and supernational organizations, in bother developed and emerging markets. Limits on concentration, credit quality and duration are governed by each investment manager s contract. Since the Fund does not utilize a target allocation approach, the following table shows the Fund s ten year average allocation: Arlington County Employees Retirement System 23

16 Asset Class 10 Year Average Allocation Domestic Equity 46.4% International Equity 18.4% Fixed Income 28.0% Cash/Short Term 2.2% Non-Traditional 5.0% Total 100.0% While the above asset allocation is not a restrictive target (see investment restrictions below), it is representative of the nature and mix of current and expected System investments. b. Expected Rate of Return The long-term expected rate of return on pension plan investments was determined using a building block method in which best estimate ranges of expected future real rates of return (expected returns, net of investment expense and inflation) are developed for each major asset class. These ranges are combined to produce the long term expected rate of return by weighting the expected future real rates of return by an asset allocation percentage which is based on the nature and mix of current and expected pension plan investments, and by adding expected inflation. Best estimates of geometric real rates of return for each major asset class included in the pension plan s expected asset allocation as of June 30, 2014 (see the discussion of the pension plan s investment policy) are summarized in the following table: Asset Class Long Term Expected Real Rate of Return Domestic Equity 5.7% International Equity 5.7% Fixed Income 2.0% Cash/Short Term 0.0% Non-Traditional 8.7% c. Investment Restrictions The following summarizes the primary investment restrictions included in the System s investment policy statement. Individual investment manager contracts typically include additional guidelines and limitations. Fixed income investments must be at least 20% of the Fund s assets at market value. The Fund must be rebalanced if the market weight of fixed income investments falls below 20%, unless the Board, acting on 24 Arlington County Employees Retirement System

17 the recommendation of staff or the investment consultant to defer rebalancing, determines that it would not be consistent with the Board s fiduciary responsibility to rebalance (increase fixed income) at that time. No new commitment to illiquid investments can be made which causes the allocation to illiquid investments, including existing market value and commitments, to exceed 15% of the System s market value. Unless the Board grants prior authorization, the investment managers may not: Invest more than 10% of the market value of each portfolio in the securities of any one issuer, with the exception of the U.S. government and its agencies Hold more than 5% of the outstanding shares of a single company in each portfolio Hold unlisted equity securities that exceed 20% of the portfolio, exclusive of holdings in banks, utilities, and insurance companies Use leverage of any sort for any purpose beyond prudent industry standards Effect short sales of securities Purchase non-registered securities, such as private placements Pledge, mortgage or hypothecate securities, except in approved security lending programs Investment managers are prohibited from: Making investments prohibited by county, state or federal law Investing in collectibles Making loans, including mortgage loans, to individuals Derivatives are allowed only in cases where their use reduces the cost of a desired transaction and/or improves the risk characteristics of the portfolio. The Board may, however, approve the use of derivatives to implement investment processes intended to add value in specifically-designated, risk-controlled applications, such as currency management. Any such value-added investment program shall be approved only where: The potential exposures have been well defined by the Board and provide for a downside risk range for the Fund within established limits The value of the designated Fund assets subject to risk due to the program does not exceed 15% of the Fund s assets In any program where an active overlay strategy combining derivatives with underlying portfolio assets is to be used, the gross amount of any long and short exposures taken on by the overlay shall not exceed the value of the designated Funds assets being overlaid The System s Investment Policy provides external investment managers with discretion to take actions, within approved guidelines, regarding each portfolio s foreign currency exposures using forward currency contracts. These contracts are agreements to exchange one currency for another currency at an agreed Arlington County Employees Retirement System 25

18 upon price and date. Investment managers use such contracts primarily to settle pending trades at a future date. Key risks include counter party non-performance and currency fluctuations. As of June 30, 2014, the System had $26,413 in open net forward currency contracts. d. Cash and Cash Equivalents At June 30, 2014, the System had cash and cash equivalents of $48,957,591. Cash deposits in bank accounts totaled $424,614. This amount was insured by the Federal Deposit Insurance Corporation up to $250,000 for each System participant. Cash totaling $48,532,977 is invested in the custodian s Short-Term Investment Fund. This account is uninsured and uncollateralized. e. Investments and Risk The System s investments are recorded at fair value based on the methodology described in Note 3. Summary of Significant Accounting Policies, Investments, on page 23. The following table presents the fair value of investments by type at June 30, 2014: Investment Type (in $ 000s) SYSTEM INVESTMENTS Fair Value Common Stock $ 490,798 Convertible Equity 13,565 Preferred Stock 1,938 Government and Government Agency Debt 45,647 Government State and Local Debt 2,937 Corporate Bonds 145,397 Corporate Convertible Bonds 188,705 Commercial Mortgaged Backed Securities 1,575 Collateralized Mortgage Obligations 559 Asset Backed Securities 5,885 Bank Loans 5,589 Pooled Equity Funds 680,753 Pooled Bond Funds 282,622 Cash and Short Term 48,112 REITs 4,855 Private Equity 46,210 Real Estate 15,939 Other (3,115) Total (1) $ 1,977,971 (1) Investment related accruals are reflected in the respective asset category; further, data on the Statement of Fiduciary Net Position (page 16) includes disbursement account cash and operating accruals not reflected in the data above. 26 Arlington County Employees Retirement System

19 Interest Rate Risk Interest rate risk is driven by changes in general interest rate levels. The price of a fixed income security generally moves in the opposite direction of the change in interest rates. Securities with long maturities are highly sensitive to interest rate changes. The System has interest rate exposure on $396.3 million of directly owned fixed income securities and on $282.6 million invested in three pooled US fixed income funds for which maturity and duration information is not available. The System s directly owned fixed income investments and maturities at June 30, 2014 are: INVESTMENT MATURITIES Investment Type Maturities (years) (in $ 000s) Fair Value Under Over 10 Asset Backed Securities $ 5,885 $ - $ 1,226 $ 501 $ 4,158 Bank Loans 5,589-1,316 4,273 - Commercial Mortgage-Backed 1, ,575 Corporate Bonds 145,397-28,664 48,316 68,417 Corporate Convertible Bonds 188,705 4, ,852 53,836 29,324 Government & Government Agencies 45,647 6,236 29,668 4,616 5,127 Government State & Local Debt 2, ,937 Collateralized Mortgage Obligations Total $ 396,294 $ 10,929 $ 161,726 $ 111,542 $ 112,097 Arlington County Employees Retirement System 27

20 Interest rate sensitivity of a fixed income portfolio is best measured by effective duration which reflects the average percentage change in portfolio value due to a 1% change in interest rates. The effective duration for the System s directly held fixed income portfolio at June 30, 2014 is shown below: INVESTMENT DURATIONS Investment Type Effective (in $ 000s) Fair Value Duration (Yrs) Asset Backed Securities $ 5, Bank Loans 5,589 - Commercial Mortgage-Backed 1, Corporate Bonds 145, Corporate Convertible Bonds 188, Government & Government Agencies 45, Government State & Local Debt 2, Collateralized Mortgage Obligations Total $ 396, Custodial Credit Risk In the event of counter-party failure, the System may not be able to recover the value of its investment or collateral securities that are in the possession of an outside party. Investment securities are exposed to custodial credit risk if the securities held by the counterparty, or counterparty s trust department, are uninsured and are not registered in the name of the System. The System requires that all investments be clearly marked as to ownership, and to the extent possible, be registered in the name of the System. 28 Arlington County Employees Retirement System

21 Credit Risk Per the System s investment policy, only U.S. Government and U.S. Government Agency obligations may exceed 5% of System assets. As of June 30, 2014, the System does not have investments in any one organization that exceed 5%. The System s credit quality distribution for the System s directly held fixed income investments of $396.3 million at June 30, 2014 is shown below: FIXED INCOME CREDIT QUALITY DISTRIBUTION Investment Type Credit Quality (in $ 000s) AAA AA A BBB BB B Below B Unrated Asset Backed Securities $ 115 $ 759 $ 1,843 $ 2,466 $ - $ - $ - $ 702 Bank Loans ,468 1,198 1,922 Commercial Mortgage-Backed 218 1, Corporate Bonds - 6,494 14,014 44,360 49,080 16,600 9,834 5,016 Corporate Convertible Bonds - - 9,951 8,579 23,172 20, ,279 Government & Government Agencies 33,649-6,766 5, Government State & Local Debt , Collateralized Mortgage Obligations Total $ 33,982 $ 9,047 $ 32,574 $ 60,759 $ 72,252 $ 42,027 $ 11,734 $ 133,919 Note: Ratings based on S&P and for securities with no S&P rating the Moody Quality Ratings were used if available. Arlington County Employees Retirement System 29

22 Foreign Currency Risk Foreign investments include equity and fixed income securities, including convertible securities and cash. The Board has authorized specific investment managers to invest in non-dollar denominated securities. These managers have the ability to hedge a portion of their portfolio s foreign currency exposure. The System s exposure to foreign currency risk at June 30, 2014 was as follows: FOREIGN CURRENCY EXPOSURE IN US DOLLARS Currency Fixed Income & (in $ 000s) Equity Convertible Cash Total Australian Dollar $ 4,415 $ 6,098 $ - $ 10,513 Brazilian Real 1,735 1,428-3,163 British pound sterling 12,917 5, ,685 Canadian Dollar 1,483 18, ,337 Danish Krone 3, ,403 Euro 15,454 34, ,363 Hong Kong Dollar 15,423 4, ,221 Indonesian Rupiah 3, ,219 Japanese Yen 1,176 10, ,712 Malaysian Ringgit Mexican Peso 654 5, ,518 New Zealand Dollar - 8,565-8,565 Nigerian Naira Philippines Peso 3, ,630 Singapore Dollar 1,634 1, ,084 South African Rand 1, ,199 South Korean Won 229 1,001-1,230 Swedish Krona 4, ,593 Swiss Franc 3, ,556 Thailand Baht Turkish lira 1, ,969 Total $ 79,484 $ 100,313 $ 623 $ 180, Arlington County Employees Retirement System

23 f. Securities Lending Under authorization of the Board, the System engaged in a securities lending program through its custodian, Northern Trust, for securities held in separate accounts. In accordance with the contract, Northern Trust may lend any securities held in custody. Only obligations issued by the US Government are accepted as collateral investment. By not accepting cash collateral, the program relies on the demand of the loaned securities as the driver on income and is not subject to collateral reinvestment risk. Minimum collateralization levels for all loans is 102% of the market value of the borrowed securities or 105% if the borrowed securities are not denominated in dollars. Loans and collateral are marked to market on a daily basis. The collateral is maintained by Northern Trust and all securities on loan are callable at any time. The System does not have the ability to pledge or sell the collateral. In the event the borrower becomes insolvent and fails to return the securities, Northern Trust indemnifies the System by agreeing to purchase replacement securities, or to remit the collateral held. There were no such failures by any borrower during the fiscal year nor were there any losses during the year resulting from a borrower or lending agent default. The securities on loan increased from $264 thousand at the beginning of the year to $20.7 million at June 30, This was the result of a planned change in custodial banks after the prior fiscal year-end. The following table details the net income from securities lending for the fiscal year ended June 30, 2014: Gross Income from Securities Lending $ 190,665 Less: Bank Management Fees (48,568) Net Income from Securities Lending $ 142,097 The following table presents the fair value of underlying securities and the value of the non-cash collateral pledged at June 30, 2014: Securities Lent Fair Value of Securities on Loan Fair Value of Non-cash Collateral Total $ 20,580,828 $ 22,360,164 None of the System s pooled fund investments have material realized or unrealized securities lending related losses. Arlington County Employees Retirement System 31

24 g. Commission Recapture Program The System participates in a commission recapture program with the Frank Russell Company. This program allows the System to recapture a portion of the commissions paid to broker/dealers by investment managers who participate in the program. All trades are placed subject to the requirement for best execution. Earnings credited to commission recapture income for the fiscal year ended June 30, 2014 were $942. NOTE 5. TAX STATUS The System is a tax-exempt governmental plan qualified under Section 401 and exempt under Section 501(a) of the Internal Revenue Code. IRS qualification letters have been received. NOTE 6. SUBSEQUENT EVENTS The Plan evaluated subsequent events through November 8, 2014 the date the financial statements were available to be issued. Events or transactions occurring after June 30, 2014, but prior to November 8, 2014 that provided additional evidence about conditions that existed at June 30, 2014, have been recognized in the financial statements for the year ended June 30, Events or transactions that provided evidence about conditions that did not exist at June 30, 2014, but arose before the financial statements were available to be issued have not been recognized in the financial statements for the year ended June 30, NOTE 7. COMMITMENTS The System has at June 30, 2014 committed to fund certain alternative investment partnerships in the amount of $148.0 million. Funding of $119.2 million has been provided leaving an unfunded commitment of $28.8 million. 32 Arlington County Employees Retirement System

25 SCHEDULES OF REQUIRED SUPPLEMENTARY INFORMATION June 30, 2014 Schedule of Changes in Net Pension Liability/ (Asset) and Related Ratios ($ in millions) June 30, 2014 Total Pension Liability Service Cost $ 52.1 Interest Changes in Benefits 0.0 Change in Assumptions 29.4 Differences between Expected and Actual Experience (11.0) Benefit Payments (86.3) Net Change in Total Pension Liability $ Total Pension Liability - Beginning $ 1,772.3 Total Pension Liability - Ending $ 1,888.1 Plan Fiduciary Net Position Contributions - Employer $ 53.7 Contributions - Employee 11.9 Net Investment Income Benefits Payments (86.3) Administravtive Expenses (0.7) Net Change in Plan Fiduciary Net Position $ Plan Fiduciary Net Position - Beginning $ 1,696.8 Plan Fiduciary Net Position - Ending $ 1,979.6 Net Pension Liability/ (Asset) - Ending $ (91.5) Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 104.9% Covered Employee Payroll $ Net Pension Liability/ (Asset) as a Percentage of Covered Employee Payroll -36.3% This schedule is intended to show information for 10 years. Additional years will be displayed as they become available. Arlington County Employees Retirement System 33

26 SCHEDULES OF REQUIRED SUPPLEMENTARY INFORMATION June 30, 2014 Schedule of Employer Contributions ($ in millions) Fiscal Year Ended Actuarially Determined Contribution $ 53.7 $ 48.0 $ 46.3 $ 43.2 $ 42.0 $ 37.1 $ 28.4 $ 24.5 $ 16.3 $ 13.9 County Contributions in Relation to the Actuarially Determeined Contributions Contribution Deficiency/ (Excess) $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Contributions as a Percentage of Covered Emplyee Payroll 22.6% 20.6% 20.7% 20.5% 19.9% 13.8% 12.6% 10.5% 8.5% 4.5% Notes to Schedule: Valuation Date June 30, 2012 Timing Actuarially determined contribution rates are calculated based on the actuarial valuation one year prior to the beginning of the Plan year. Methods and Assumptions Used to Determine Contribution Rates: Actuarial Cost Method Entry Age Normal Cost Method Asset Valuation Method Five year, smoothed Amortization Method Level Percent Open Discount Rate 7.5% Amortization Growth Rate 4.0% Inflation 4.0% Salary Increases 4% plus merit/senority component which vary by year of service and are compoounded annually Mortality General and Uniformed RP-2000 Employee Mortality projected to 2010 by Scale AA for active employees; RP-2000 Healthy Annuitant Mortality projected to 2010 by Scale AA healthy retirees and beneficiaries; RP-2000 Disabled Mortality projected to 2010 by Scale AA for disabled lives School RP-2000 Employee Mortality with White Collar adjustment projected to 2010 by Scale AA for active employees; RP-2000 Healthy Annuitant Mortality with White Collar adjustment projected to 2015 by Scale AA healthy retirees and beneficiaries; RP-2000 Disbled Mortality projected to 2010 by Scale AA for disabled lives Schedule of Investment Returns Fiscal Year Ended 2014 Annual money-weighted rate of return, net of investment expense 18.1% This schedule is intended to show information for 10 years. Additional years will be displayed as they become available. 34 Arlington County Employees Retirement System

27 SUPPLEMENTAL INFORMATION SCHEDULE OF ADMINISTRATIVE EXPENSES Personnel Services Staff Salaries Benefits Total Personnel Services $ 337, ,675 $ 454,039 Professional Services Actuarial Attorney Audit Total Professional Services $ 74,907 38,039 35,000 $ 147,946 Communications Telephone $ 2,267 Postage and Shipping 1,423 Total Communication $ 3,690 Data Processing Printing Computer Supplies Total Data Processing $ 2, $ 2,776 Education Manager Meetings Conferences Subscriptions Total Education $ 11,929 10,517 3,397 $ 25,843 Miscellaneous Insurance Supplies & Furniture Bank Fees Other Miscellaneous (1) Total Miscellaneous $ 48,424 2,224 24,452 (27,964) $ 47,136 Total Administrative Expenses $ 681,430 (1) Consists primarily of OPEB management costs reimbursed by Arlington County and Arlington County Public Schools Arlington County Employees Retirement System 35

28 SUPPLEMENTAL INFORMATION SCHEDULE OF INVESTMENT & CONSULTANT EXPENSES Investment Expenses Investment Manager Fees (1) $ 5,688,555 Custody Fees 240,485 Total Investment Expenses $ 5,929,040 Other Consultant Expenses Total Other Consultant Expenses $ 724,550 (1) Management fees as presented include all fees that are either directly invoiced or readily separable from investment income. Several of the alternative investment managers provide account valuations on a net of fee basis. Management fees are netted against investment income and because they are not readily separable for specific investment income, amounts are recorded and reported net of fees. 36 Arlington County Employees Retirement System